Starting from long-run equilibrium, the long-run impact of a war that raises government purchases, compared to the original equilibrium, is:
A)higher inflation and the same output.
B)lower inflation and lower output.
C)lower inflation and the same output.
D)higher inflation and higher output.

Question

Quizplus · Accepted Answer

An increase in government purchases shifts aggregate demand right and increases the short-run equilibrium. As a result of this expansionary gap, inflation will gradually increase, thereby shifting the SRAS line upward. When inflation has risen enough, the economy is back in long-run equilibrium at potential output again - only now with a higher rate of inflation.

Starting from Long-Run Equilibrium, the Long-Run Impact of a War